Europe Forged in Crisis: The Emergence and Development of the EU

“Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.” – Jean Monnet

These are turbulent but confusing times in Europe. The Great Recession has taken a serious toll. In Portugal, Italy, Ireland, Greece, and Spain (the PIIGS), intervention by the EU in domestic policy seems unprecedented. Portugal, Ireland, and Greece were forced by financial markets into bailout agreements with the “Troika.”1 In Italy, under the watchful eyes of Europe, the unelected technocratic government of Mario Monti replaced the elected government of Silvio Berlusconi – and not a single member of this new technocratic government was elected. Spain negotiated with the Troika, but was saved by changes in the financial markets.

The EU’s intervention has not been restricted to the so-called European periphery. In the Netherlands, the government fell in 2012 under pressure from the European Commission to implement major spending cuts. The subsequent government did as it was told. In France, in the summer of 2014, the Prime Minister presented the resignation of the entire government to the president, in protest over the implementation of the austerity programme demanded by the EU.

The political reaction has been fierce, with demonstrations, riots, and occupations a frequent occurrence across Europe. There has also been an electoral backlash. In the UK, France, and Denmark, the far right topped the polls in the 2014 European Parliament elections, while in Italy, the Five Star Movement led by the clownish Beppe Grillo came second. Across Europe few governments now last more than one term. Jean Claude Junker, then Luxembourg’s Prime Minister and now the incoming President of the European Commission, lamented: “We all know what to do, but we don’t know how to get re-elected once we have done it.” But the story can be told equally well in reverse: we all oppose what you’re doing, but even when we elect someone different it keeps being done.

This phenomenon whereby policies are decided by Europe, implemented nationally, and contested helplessly is not as new as it may seem. We need only think of the Juppe plan in France in 1994, which led to France’s largest strike wave since 1968. This was just an early example of a government implementing hated policies in order to meet an EU target. What is new is that with the current crisis, this is not happening in one or two countries but across the EU simultaneously.

Although the EU is not new, and its role in determining the economic and political development of Europe is both substantial and well established, critical analysis of the EU is sorely lacking. Most of what is written on the EU is uncritically liberal and focuses on diplomatic and legislative detail.2 What little critical literature exists often simply interprets the EU in terms of the function it plays for neoliberal globalization. At one extreme, it is portrayed as a transnational capitalist conspiracy, while at the other extreme the critique is limited to identifying the wrong policies: too much liberalization, privatization, etc.3 When analyses of the EU go from what it does to the larger questions of what it is and why it exists, analysis often becomes completely un-rooted. We see nonsense claims about the idea of a united Europe across time, sometimes extending to hagiographic accounts about the founding fathers of Europe.4 At times it is truly absurd: Europe is a bastion of social democratic anti-imperialist capitalism in distinction to the USA.5 Other times more intriguing claims are made, such as the argument that the EU is a neo-medieval state like the Holy Roman Empire!6

Curiously the question of whether the EU is a state or not and, if so, what kind of state is it, rarely connects the development of the EU polity with what has been at its core: economic integration. The state is treated as though its existence and form can and should be understood separately to the question of the economic reproduction of society.

Instead, I will try to address the emergence and development of the EU as a new political form by focusing on the underlying process of economic integration: why was economic integration needed and why did its establishment involve the creation of the EU? Pursuing this question will allow us better understand what the EU is in relation to the state, how it developed, and what it does.

European integration should not be understood as a steady and continuous progress towards “ever closer union.” Rather, we need to understand the development of the EU as an iterated process of dealing with crises of capitalist reproduction that arise from working class power and the threat of working class autonomy. This iterated process can be seen then as having two waves, the first one emerging in the late ’40s and ’50s, the second emerging in the late ’80s and early ’90s, and continuing to develop ever since.7

I: Economic Regulation and State Form

In order to root my analysis of the relation between the form of political institutions (the EU and the national state) and the economy, I want to begin this article with a brief theoretical consideration of this issue. I would like to step back from Europe and discuss the nature of the state and its relation to economic regulation over a much longer time frame. I draw substantially here on both, what Benno Teschke has called the “theory of social property relations”8 and on the state derivation debate in the 1960s and 70s.9

The question always facing materialist social analysis is: “how does a society reproduce itself?” The answer to this question differs across history, but in every society central to the question of how a society reproduces itself is the question of the extraction of surplus labor.10

In pre-capitalist forms of society the extraction of social surplus occurs primarily under threat of direct violence.11 For example, a peasant worked a corvée for their lord because that lord could directly threaten violence on the peasant. Importantly, here both economic power (the power to buy, sell and exploit) and political power (the control of violence) are united in the one person, the lord, whereas under contemporary liberal capitalist society these powers are separated. With the separation of economic and political power, the exploiting subject that extracts surplus labor no longer directly or personally holds the threat of violence. Under capitalism, this exploiting subject, i.e. the capitalist, is the subject of a logic of accumulation through exploitation independent of the use of violence, but which requires a form of violence equally independent from the process of exploitation. This mutual requirement of independence is symbiotic. Neither the economic nor the political can exist or be understood independently of the other, despite their necessary mutual independence.

This independent process of exploitation occurs through a seemingly non-violent form of legal contracting. This free contracting involves the capitalist paying the worker the value of their labor-power, which is less than the value of the goods they produce. However, despite the apparent political neutrality of this contract, workers engage in it is because they lack independent access to the means of production. Therefore, they are incapable of satisfying their own needs and desires except by selling their labor-power to an employer. This of course raises the question: “why do workers not have access to the means of production?” The well-rehearsed answer is that the means of production are the private property of the capitalist, and this private property is publicly enforced through the public power of state violence. This returns us to the bifurcation of social power into private, economic power to contract and public, political power to enforce contracts. The economic power to buy, sell and, most importantly, to exploit, and the political power to enforce, are separated under capitalism. Through the separation of the political power of enforcement, economic power takes on a natural semblance devoid of force. The violence that is involved in ensuring the operation of capitalist processes of exploitation is separated into the sphere of the state.

The fundamental characteristic of this separate political sphere of the state is its control of violence. But what this violence is there for is to ensure the operation of capitalism. It is to ensure that seemingly neutral property rights exist. These property rights are ensured through the creation of laws and regulations regarding the operation of these property rights and through the use of violence to maintain the operation of these laws and regulations. However, as this political sphere is where laws and regulations are decided, they are also where these property relations can be contested and feasibly changed.12 The state is therefore simultaneously the institution through which the legal framework of capitalist reproduction is put in place, the violent organization that enforces that framework, and the institution through which antagonism to capitalist reproduction can be mediated. The state mediates class antagonism by being the institution that implements the legal framework through which class relations are maintained. To reiterate, we can point to three aspects of the state, firstly, a legal framework for exploitation to occur, secondly, a medium for the mediation of class antagonism, and finally, a means through which these property relations are violently imposed and maintained.

This framework will help us understand the changing nature of the state in the twentieth century, with the increasing incorporation and mediation of class conflict within the state. And it will help frame the fundamental argument of this article: that the development of the EU needs to be understood as a bifurcation of the state, where the regulation of capitalist reproduction takes place at a European level, while the mediation of class antagonism and the enforcement of these regulations remains at a national level.

II: The creation of the EEC (1914-1957)

The Crisis of the Interwar Period

By 1945 Europe had experienced over 30 years of chaos. Beginning in 1914, the continent had seen over 10 years of war, and 70 million deaths. The 21 interwar years were marked by permanent volatility, with extreme economic and political crises. It was from this chaos, and more specifically the crisis of the postwar years, that European integration was born.

World War I marked the end of the long period of peace, liberalism, free trade, and unprecedented economic growth that defined 19th century Europe. There were therefore repeated attempts after the war to return to the 19th century order. But they all failed, and the economy slumped. Growth of GDP per capita in Western Europe between 1913-1950 was 0.8% per annum, lower than any period between 1820 and 2000.

In addition to economic failure, the period was one of extreme political volatility. Immediately after the war there was the revolutionary wave, which in many ways continues to define the ideational identity of the radical left. This wave coincided with the expansion of suffrage, the rise of mass parties and mass unions, increased democratization of the state, and the politicization of the economy. In Russia this revolutionary movement took state power, while in Italy, Spain, Germany, Austria, Greece, and Portugal the fascist counterrevolution took state power. In other countries the high levels of class conflict lead to the creation of some form of democratic corporatism: the Basic Agreement in Norway (1935), the Peace Agreement in Switzerland (1937), and the Basic Agreement in Sweden (1938).

As World War II approached it was widely expected that the crisis of the interwar years would continue unless there was some final resolution. For the Axis powers this solution was the victory of the Third Reich. But others had different hopes. On the Left, many believed that World War II would end with a revolutionary wave greater than that at the end of World War I. Leon Trotsky founded the Fourth International with the explicit aim of acting act as the “head of the revolutionary tide” which would inevitably follow the war.13 For leaders of the allied nations, it was equally clear that postwar reconstruction could not follow the same path as after World War I.

In August 1941, Winston Churchill sailed to Newfoundland to meet with President Roosevelt to agree on the “Atlantic Charter,” an eight-point plan for postwar reconstruction. At the center of this plan was a clear commitment to lower trade barriers and to the rather social democratic goal of bringing “about the fullest collaboration between all nations in the economic field with the object of securing, for all, improved labor standards, economic advancement and social security… and which will afford assurance that all the men in all the lands may live out their lives in freedom from fear and want.”14 While the sincerity of this commitment can easily be questioned, it is clear that a lesson had been learnt from the interwar crisis and the postwar period would be different.

Postwar Settlement

After World War II, Trotsky’s anticipated revolution never happened. As can be seen from Table 2, the years from 1946 to 50 experienced far less labor unrest than those immediately following WWI. This does not mean there were no revolutionary pressures. Across Europe communist parties were growing rapidly, and in some countries were winning elections. But instead of leading to socialism, Europe saw the creation of what has been called the postwar settlement.

This postwar settlement resulted in the rise of the welfare state, full employment, and the incorporation of workers’ organizations into the management of capitalist development. It also saw an unprecedented economic boom and a massive increase in international trade.

The growth boom is remembered well across the Western world. In almost every country the thirty year period after 1945 has a unique name emphasising its novelty: Les Trente Glorieuses (France), Wirtschaftswunder (Germany), Rekordåren (Sweden), the “Economic Miracle” (Italy, Japan and Greece) or simply the “Golden Age” (United States and UK). As Table 1 shows, growth in Western Europe in this period was around 4% per annum, the highest growth ever recorded for Western Europe and startlingly higher than the 0.8% growth in the interwar period.

The boom in international trade, while not as well remembered, is even more dramatic. As can be seen in Table 3, while during the interwar years exports declined, the postwar years saw a massive increase in international trade.

The postwar growth boom was driven both by this increase in international trade and by a significant increase in investment.

Central to this growth in investment were the institutions created as part of the postwar settlement. These “institutions solved commitment and coordination problems in whose presence neither wage moderation nor the expansion of international trade could have taken place.”15 Under these institutions workers moderated their wage claims, making profits available to capitalists to reinvest. Capitalists restrained dividend payouts in order to reinvest. Investing in modernization and expansion of productive capacity stimulated growth and increased the future income of both workers and capital owners.

The benefit for employers was that the threat of an insurgent working class was avoided; for the organized working class, it was a seat at the table, which facilitated the other aspects of the postwar settlement – it enabled the creation of the welfare state and the oversight of rising living standards and full employment.

However, the postwar settlement went further than the conflict between labor and capital. The instability of the interwar years was not only created by working class militancy. In Germany, Italy, Spain, Austria and elsewhere the far right had come to power on the basis of a popular movement dependent on the support of disgruntled nationalist farmers.16 During the great depression, agriculture was hit badly, resulting in growing demands for autarky and the protection of agricultural producers from the world market. The solution to these issues in the postwar period was the creation of the Common Agricultural Policy (CAP). Before getting to CAP, we need to look at the emergence of the European Economic Community (EEC).

The Birth of Europe?

The standard political narrative regarding the EU is to pose the alternative as being either for Europe or for national sovereignty. The appeal of national sovereignty here is obvious both to the Left and Right. For the Right national sovereignty means the collective nation walking its own path, and for the Left it means people democratically determining their own social development. The postwar period was an era whereby national peoples were able to determine their own domestic policies in a highly democratic and free manner that was unprecedented. Today both the Left and Right recall this period wistfully.

A seeming paradox here is that this emergence of popular sovereignty went hand in hand with the development of a level of supranational governance that had never been seen before. Internationally, this was represented by the creation of the IMF, GATT, and World Bank. But this development was even more extreme in Europe, where a vast array of new institutions emerged: the Organisation for European Economic Co-operation (OEEC), which exists today as the Organisation for Economic Co-operation and Development (OECD), the European Atomic Energy Community (Euratom), the Western European Union (WEU), the European Payments Union (EPU), and of course the European Coal and Steel Community (ECSC) and the European Economic Community (EEC). Between them, these organizations marked a new phase in the political organization of the European economy.

In order to disentangle the paradox of a simultaneous increase in national democratic sovereignty with the increase in European supranational governance, it is necessary to depart with some of the mythology surrounding the birth of the European Union.

A frequent story often told is that the early development of the EU was driven by a noble few or a sinister cabal, depending on the political perspective. But regardless of the perspective, the names are generally the same. At the front is the French civil servant Jean Monnet and Robert Schuman, the Luxembourg-born French Prime Minister (1947-1948). The supporting cast is provided by Altiero Spinelli, the Italian author of the Ventotene Manifesto; Paul-Henri Spaak, Prime Minister of Belgium (1947-49); Konrad Adenauer, Chancellor of Germany (1949-1963); and Walter Hallstein, a German civil servant who became the first president of the Commission of the European Economic Community (1958-1967).17

The legend is that a few people determined to establish peace across the continent, and convinced of the need for a European Federation, set about establishing a European state bit by bit. The first step in reaching this high and noble ideal was an agreement on coal and steel, and the rest naturally followed.

Indeed the Treaty of Paris and the creation of the European Coal and Steel Community (ECSC) is a rather odd moment of international diplomacy. It emerged as a proposal from the rather grandiose “Schuman Declaration,” made by the then French Foreign Minister on May 9, 1950, which gave “world peace” as its aim, and “a united Europe” as its interim objective, but settled for “the pooling of coal and steel production… as a first step.”18

In addition to these overflowing statements, the treaty overflowed with institutions. To administer a common market in coal and steel, it created in embryo the institutions of the modern EU: a High Authority (the precursor of the European Commission), a Common Assembly (the precursor of the European Parliament), a Council of Ministers (the precursor of the Council of Ministers), and a Court of Justice (the precursor of the Court of Justice of the EU).

In order to understand why the European federalists came to found the ECSC, the important issue is less their federalist ambitions, but rather the actual issue of European coal and steel production.

The coal and steel heartlands of continental Europe encompassed the borderlands of Germany, Luxembourg, France, and southeast Belgium. It had been at the centre of all recent western European military conflicts, as well as being both economically important and potentially highly economically integrated. It was a region both where the breakdown of international trade mattered greatly and where the industrial working class was at its strongest.

The question, therefore, was how to manage the transition to a liberal market economy while avoiding social conflicts that might arise from that transition. The content of the Treaty of Paris is therefore focused heavily on the social difficulties in managing the transition to an integrated coal and steel market. It is striking from any brief perusal of Title III of the Treaty, the section which deals with the coal and steel industries, how much of it is focussed on matters such as “the possibilities of reemployment… of workers set at liberty by the evolution of the market or by technical transformations” or “the appraisal of the possibilities of improving the living and working conditions of the labor force… and of the risks which menace such living conditions.”19

Alan Milward supports this understanding when, in his detailed discussion of the social dynamics behind Belgian participation in the ECSC, he writes “The Treaty of Paris can be understood not just as the diplomatic substitute for a peace treaty, but also as the moment when Belgium formally entered the mixed economy… It ratified the shift to public responsibility in management, to the incorporation of the labor force into that responsibility, and to the commitment of the state to welfare and employment.”20

However, the importance of the ECSC should not be overstated – although it often is. The ECSC was important in primarily two ways, firstly, it was an early step in the direction of the creation of the common market; secondly, it created the institutions of the EEC. However, the ambition of an integrated European economy was not realized with the ECSC. In fact, the ECSC was really only a very small step in that direction.21

The first major step in the creation of the EU was not the Treaty of Paris or the ECSC; it was the creation of the EEC with the Treaty of Rome. Today the Treaty that started as the Treaty of Rome constitutes roughly three quarters of the “constitution” of the EU.22

International Trade and Social Protection: The Creation of the EEC

As we have already emphasized, central to the postwar boom was the growth in postwar trade (see Table 3). In Europe this was enabled by the creation of the Common Market with the Treaty of Rome.23 The Common Market entailed a customs union — no internal tariffs or trade barriers. It was to be administered through the European Economic Community (EEC), which inherited the ECSC institutions.

From the Treaty of Rome onwards the EEC was to present a single economic tariff and customs bloc to the rest of the world, while internally trade would be free.

But why was the creation of the EEC necessary? In the late 19th century, tariff barriers were radically reduced across the Western world and a Commission, an Assembly, a Council of Ministers, and a Court of Justice weren’t necessary. Through the wonders of the “most favoured nation” clause, economic integration appeared to develop naturally.

However, after World War I, things were different. With the rise of democracy and the organized working class in the first half of the twentieth century, the separation between liberal politics and the liberal economy were threatened. The economy was politicized. In the interwar period there was no successful resolution of this problem.

After World War II, the problem was resolved through the incorporation of the organized working class into capitalist governance. This entailed both an expansion of the state into new spheres of socioeconomic life as well as its increased democratic administration.

Therefore the integration of European trade after the war required not only the reduction of barriers, but also the means through which the reduction of these barriers could take place without threatening the living standards of European citizens.24

We can see this clearly in the negotiations leading up to the creation of the EEC. Central to these negotiations were concerns regarding issues such as wage rates, differences in holidays, and the fact that working hours in the French automobile industry were 40 hours per week, while they were 48 in Germany. Even the question of equal pay for women was on the agenda.

Here, we can finally return to the issue raised earlier regarding farmers. The Treaty of Rome included a commitment to the creation of a Common Agricultural Policy (CAP). Whilst the signatories of the Treaty did surely not anticipate the current size of the CAP in 1957, it serves as another example of creating a means through which citizens could be protected by the state from the disruption and threat of free and open markets. This kind of defensive mechanism defines what is novel about the approach to the reduction of trade barriers brought about by the Treaty of Rome.25

The creation of the EEC brought about the reduction of trade barriers, the expansion of trade within Europe and thereby contributed to growth and capitalist development. The creation of this supranational organization created a new means through which the rules of economic life could be set. It thereby increased the power of national states to set these rules and facilitated the increased democratic administration of economic life.

It can now be seen how opposing national sovereignty to European governance makes little sense. Rather than threatening the power of the state, the EEC was created as a means through which the power of the state could be preserved and enhanced.

III: From Consensus to Crisis (1957-1984)

The establishment of the EEC ushered in the first wave of European Integration, after which little changed for nearly 30 years. Indeed, it was not until the mid-1980s that the process of European Integration was renewed.

But this is not at all to say that nothing was happening. Indeed, one can retrospectively discern three very important developments. First, expansion; second, the flurry of failed proposals; and finally, the early moves towards monetary union.

Perhaps the most major change in the EEC between 1957 and 1986 was its expansion. First the UK, Ireland, and Denmark joined (1973). They were followed later by the recently democratized Greece (1981), Spain and Portugal (1986).26

The second development was the flurry of failed reforms. Amongst these, there were proposals for a common currency (see the Werner report27), proposals for a massive expansion in Europe’s fiscal capabilities (see the MacDougall report28), and proposals for developing a European social democracy (see the Social Action Programme arising from the Paris summit29). However despite these debates, processes, reports and agreements, very little of these proposals actually materialized, and they are therefore of limited interest and importance.

The one major development that did take place was the response of EEC states to the breakdown of the Bretton Woods system. First, there was the “snake in the tunnel,” then simply “the snake”. This was followed by the European Monetary System, which lasted the early 1990s. I will cover these in some more depth below. But first, it is worth considering why these developments happened at all.

The Postwar Settlement becomes Unsettled

As described above the postwar settlement was a fundamentally unstable arrangement, under which the working class agreed to moderate wage demands and the capitalist class agreed to invest the surplus profits generated by this wage restraint. The result was an unusually high level of investment in the postwar period (See Chart 2). This arrangement was managed through the expansion and integration of working class organizations into capitalist governance. The instability arose from the fact that at any point there were gains to be made from abandoning this agreement. There was an additional problem; the integration of the working class into capitalist governance was brought about partially as a means of avoiding revolutionary conflict. In other words, in order to avoid the threat of working-class organizations seizing power and expropriating the capitalist class, these organizations were integrated into the management of capitalist development. However, this integration brought about a dramatic increase in the size and power of workers organizations, both as integrated bodies and, potentially, as independent actors. For those who believed in the potential of revolutionary action, the opportunities for the revolutionary activity of the working class were not dwindling, but rather growing.

Increasingly, the problem for the revolutionary elements in the workers’ movement was not organization; it was the bureaucratic leadership of the workers’ movement, which had become integrated into capitalist management. This problem was expressed differently by different sectors of the newly emerging New Left, perhaps most clearly in Trotskyism: “The historical crisis of mankind is reduced to the crisis of the revolutionary leadership.”30 But similar sentiments can be seen in Maoism, anarchism, and the general rise of anti-authoritarian movements, in which notions of self-management and self-managed autonomous struggles became paramount.

Extricating the exact causal relationship is difficult, but by the late 1960s, strikes were increasing, profit rates were decreasing, and the investment rate began its decline.

In France, days lost to strikes more than doubled. In 1962-1966, annual days lost were 32 per 100 workers; between 1967-1971 it was 350 days lost to strikes per annum. This figure was of course largely driven by the revolutionary crisis of May 1968. In the UK, the figure also more than doubled. It climbed from 23 in 1962-1966, to 60 in 1967-71. However, in the UK the number of strikes continued to rise throughout the 1970s, and only began to fall after the election of Thatcher. In Italy, the workers’ movement was in the 1970s perhaps the most militant of anywhere in Europe, and the days lost to strikes nearly quadrupled, from 64 annual days per 100 workers in 1953-61 up to 200 days in 1972-1976 (see Table 2).

oisin chart 1
Source: Phillip Armstrong, Andrew Glyn, John Harrison, Capitalism since 1945, 352.
Profit rates went in the opposite direction, as can be seen in Chart 1. Here we see the weighted average net manufacturing and business profit rates for France, Germany, Italy, and the UK. As can be seen the net manufacturing profit rate decreased from 24.3% in 1955 to a low of 8.8% in 1975.31

By the late 1960s, the investment rate had also started to decline. As can be seen in Chart 2, in Germany it fell from 37% of GDP in 1965 to less than 27% in 1975. In the UK and France, the postwar rise in the investment rate came to an end.32

oisin chart 2
Source: Penn World Tables 8.0
Not only was there a crisis in the private sector, but the postwar state continued to expand in order to meet rising demands for the universal provision of social services. As can be seen from Table 4, the size of the government sector in Western European economies had been increasing throughout the twentieth century, and by the mid-1970s there was little sign this trend would be coming to an end.

Table 4. Total Government Expenditure as Per Cent of GDP at Current Prices, 1913–1999

However, despite the significant rise in social spending during this period, social conflict did not abate, and the legitimacy of the existing political order was being increasingly undermined.

A telling example was in Britain, where, in 1973, industrial action by the National Union of Mineworkers (NUM) had reduced the supply of electricity to the point where the Conservative government was forced to declare a three-day-week. But public support was largely behind the miners. The Prime Minister sought a mandate to take on miners and called a snap election under the slogan “Who governs Britain?” – the government or the labor movement. The Conservatives got their answer when they were kicked out of office, and the Labor Party was voted in.

The reaction to the crisis of the late ’60s and ’70s was largely to concede to the demands of the movement. Wages went up, profit shares went down, government expenditure increased, and the doors were open to the social movement to come inside and share power. In brief, the postwar solution was extended. Rather than aiming to suppress the movement, it was thought that a demobilizing democratic resolution was possible.

This enables us to understand the flurry of well-meaning and often ambitious proposals that developed at a European level in this period, such as the aforementioned MacDougall report, which proposed to massively increase Europe’s spending power and move some fiscal decision-making to a European level. It also helps us understand the Social Action Programme, which emerged from the 1972 Paris summit, and began that ephemeral dream of the European liberal Left: “Social Europe.” The political space from which these proposals arose was a crisis whereby the trajectory of postwar development was breaking down and generating a desire for new solutions. But none of these projects ever had any real legs. The reason for this is equally obvious – they could not solve the problems that existed within the nation states of Europe.

The only proposal that did get some real traction was the one that was at first merely intended to solve a problem arising from America.

The Breakdown of Bretton Woods

It is widely believed that a major contributing factor to the economic chaos of the interwar period was the gold standard. This operated through the declared commitment to maintain convertibility of currency into a specified amount of gold. Thereby all currencies were fixed in value against a homogenous internationally tradable commodity. In order to maintain gold convertibility, countries needed to pursue a set of economic policies to avoid balance of payments problems and maintain their gold reserves. This could involve cutting wages and government spending, regardless of the effect this might have on the country’s wider economic health, the living standards of its citizens, or its political stability. Accordingly, this led to many problems in the interwar period.

Therefore, in 1944 an agreement was reached that the postwar monetary system would be much more flexible. It was agreed that the US dollar would be convertible into gold, and every other currency would be convertible into dollars. This allowed for adjustments to a country’s exchange rate. For example, if workers in a country brought about wage increases and thereby made that country’s exports uncompetitive, it would be possible to adjust the exchange rate so that the value of the national currency would be worth less in dollar terms, reversing some of the negative effect that this wage increase might have.

By 1971, almost all of America’s main competitors had devalued against the dollar on a number of occasions, and as wage demands, the cost of social services, and the cost of the war in Vietnam rose, America found itself in a situation where it had a growing balance of payments problem and an overvalued currency. The solution was obvious, and the US ended dollar-gold convertibility. The stated intention was to devalue the dollar but maintain the system more or less unchanged. And indeed, a few short months later, the “Smithsonian Agreement” was signed, which largely returned the system to how it operated before. One significant change, however, was that currencies were now allowed to fluctuate against the dollar more than previously. Under the new Smithsonian Agreement, countries could fluctuate ±2.25% against the dollar. However, this meant that in the EEC, currencies would now be able to fluctuate much more against one another.33

The response to this drew on the Werner Report (1970), which laid out a plan for creating a single European currency. The EEC countries agreed to allow their currencies fluctuate by only ±2.25% against one another. This framework, whereby European currencies fluctuated within a smaller band than the band for fluctuation faced by other countries, was called “the snake in the tunnel.” However, very shortly after the signing of the Smithsonian Agreement, its “tunnel” fell apart and the international monetary system moved to free floating exchange rates. In Europe, however, the snake persisted without the tunnel. But even this was only of limited success, and through the 1970s countries entered and exited the snake depending on their domestic economic situation. In 1979, therefore, the European Monetary System was created, which operated on more or less the same principle, only in a more structured manner.

Despite this important change, looking at the long period between the Treaty of Rome (1957) and the Maastricht Treaty (1992), we can see relatively few developments. It is therefore useful to consider European Integration as occurring in two waves. The first was established by the Treaty of Rome, was centered on the common market, and lasted until the mid-80s. The second was established by the Maastricht Treaty and lasts to this day. This second wave was centered on the single market and the common currency, whose early moments I have just described. However, before we consider the development of this second wave from 1992 onwards, it is worth considering the situation in Europe in the 1980s that it developed in response to.

The Delayed Resolution of the Crisis

By the late 1970s the crisis that had emerged in the mid-60s was still not resolved. Profit rates were continuing their decline and had not recovered (See Chart 2). Investment rates had fallen substantially (See Chart 1). Growth rates were substantially lower than what they had been during the 1945-1975 period. In addition, the re-emergence of unemployment became a major social problem. This was in fact a very significant change, since full employment had been the norm across Western Europe for the entire 1945-1973 period (see Table 5).

And society was still politically highly unstable. In Italy, the very high level of industrial activity continued, albeit with greater desperation. This hopelessness saw the beginning of the “Years of Lead,” which perhaps reached its peak with the kidnapping and execution of former Italian Prime Minister Aldo Moro by the Brigate Rosse in 1978. Such violence was not limited to Italy. Germany witnessed left-wing guerrilla activity during this period as well, with such groups as the Rote Armee Fraktion, Rote Zellen, Rote Zora and the June 2 Movement. The UK experienced left-wing armed activity in the north of Ireland and, in Britain, there was a persistent increase in strike activity.

Indeed, the British winter of 1978-1979 was rocked by a strike wave that is remembered as the “Winter of Discontent.” This strike wave was both felt and visible across the UK. The fact that the winter was one of the coldest on record did not improve things. City centers filled with uncollected trash. Infamously, in Liverpool, the city was forced to hire an empty factory to store corpses as the gravediggers struck. The UK had to go to the IMF for a £2.3bn loan. By the time an election was called in 1979, the Conservative party under Margaret Thatcher won.

Thatcher famously used her mandate to take on the British labor movement piece by piece, until what was once one of the strongest and most militant labor movements in Europe was destroyed. Today in Britain unions scarcely exist outside the public sector, and strikes are a minor issue economically and politically.

Although the social movement of the 1960s and 1970s were filled with hope, by the late 1970s the movement had reached an impasse. It could continue to force the state to increase its social spending, but it was unclear how to fund it. Equally, it could continue to increase wage demands, but it was clear that this was reducing profit opportunities and damaging the economy. The next step seemed unclear, and many believed the moment for a break with capitalism had passed.34 As these hopes faded, the emerging voices from the Right for a return to pre-war liberalism began to gain favor.

Of course, the Left did not simply abandon its project, and the debates of this period remain of real interest.35 And although across Europe the labor movement was suffering defeats: the mass arrests in Italy 1979-1981,36 the defeat at FIAT Mirafiori (1980),37 the UK Miners’ Strike (1984), Wapping (1986), etc. There were other attempts to find another route for the Left. Perhaps the most successful was François Mitterrand’s electoral victory in France in May 1981. This brought together much of the Left, many of the militants of 1968, along with many of the political refugees fleeing persecution in Italy. Mitterrand was elected on a radical platform named the “110 Propositions for France.” This involved a major push further towards more social control of the economy. There were several nationalizations and the minimum wage, statutory holidays, pensions, health insurance for the unemployed, social housing, family allowances, taxes on wealth, were all increased, while simultaneously the workweek was reduced. However, as this happened, capital began to leave the country. With inflation continuing to rise, France faced a persistent and serious balance of payments problem. The franc was devalued in October 1981, again in June 1982, and yet again in March 1983! Ultimately, Mitterrand was forced to abandon his left-wing economic policy and launched the “Franc Fort” (Strong Franc) policy. This involved a major shift to austerity, and in many ways the end of postwar social democracy. From this point on across Europe, the parties of the Left reoriented themselves towards a pro-market, neoliberal approach to the economy.

Neoliberalism?

Despite the appearance of neoliberalism as an intellectual movement, it is important to treat it as neither a purely intellectual phenomenon nor as a return to normal. Neoliberalism emerged as a response to the prolonged political instability and economic downturn of the 1965-1985 period. While the prolonged political instability is often underplayed and reduced to the momentary madness of May 1968, the economic downturn is often overplayed. By almost any measure, European economies were doing better in the 1970s than at any point since. The growth rate was higher, the investment rate was higher, the unemployment rate was lower and inequality was lower. Compared to the economic situation in the 70s, the only clear improvement for workers today is that inflation has stabilized at a low level. However, low inflation primarily benefits creditors and capital owners. Other changes also benefit capitalists. Strikes have gone down dramatically. Tax rates have stabilized and the growth of the public sector has been more or less halted (although contrary what much of the left might say, it has not reversed) (see Table 4). And, by most measures, the profit rate has risen again.

Presumably in 1975 it was possible for Europe to continue to develop away from capitalism and place the economy under increasing democratic control. Whether this might have been achieved through socialist revolution, autonomous action, or legislation, is unknown to us because, of course, it never happened.

In the Western European countries where revolutions did happen,38 despite their revolutionary commitments, these societies quickly entered the Western liberal order. The high points of workers’ autonomy in Italy and the UK were crushed, and the more nebulous forms of autonomy among squatters and environmentalists in Northern Europe were gradually hacked away at, so that little remains but some interesting concert venues and the embarrassment of the Green parties. Where legislative reform was attempted, most significantly in France under Mitterrand, the renewed freedom of capital to flow across borders brought about rapid balance of payments problems, forcing the reforms to be abandoned.

In short, by the early ’80s the Left was at an impasse while the Right had a clear agenda: liberalize!

Seen from the Right, the problem of the European economy and the reason for the downturn was an over-empowered labor movement and excessive government intervention in the economy. What was necessary therefore was to facilitate the process of private firms competing for profits via the market. By stimulating trade and profit-making, this would lead to increased investment, growth and employment. Central to this process was increasing cross-border European trade.

IV: The Second Wave of European Integration (1984-Today)

The second wave of European integration began with the Single European Act (1986) and was properly established with the Maastricht Treaty (1992). The Maastricht Treaty is perhaps the most significant of all treaties relating to European integration. It created the European Union and along with the Treaty of Rome (1957), the Maastricht Treaty is the basis of one of the two “Treaties” that form the core of the European constitution.39

The core of the establishment of this second wave of European Integration was the creation of Economic and Monetary Union (EMU) under Maastricht, which in turn involves two key elements: the creation of the Single Market and the creation of the Euro.

It is worth distinguishing the Single Market from the Common Market. The first was established under the Single European Act (1986), the latter under the Treaty of Rome (1957).

The core of the common market (i.e. the EEC) was, as discussed earlier, the creation of a tariff free area within Europe for the international trade of nationally produced goods. These goods were, even when produced by multinationals, produced within nation states in a manner laid out by national legislation. The logic behind this process was to democratically manage the transition to free trade. This involved the incorporation at the national level of working-class and farmers’ organizations into capitalist management. The aim was to maintain living standards and avoid the chaos of the interwar years, while still getting the benefits of higher levels of trade and market expansion and integration. In other words, the logic was one that saw the postwar maintenance of a market society through the exercise of social control over the market.

The Single European Act is often presented as simply being a part of the further extension of an undetermined process of “ever closer union.” It is often suggested that it was simply a matter of “completing” the common market.40 However, the logic of the creation of the single market was qualitatively different from the creation of the EEC. Whereas the creation of the EEC was embedding the market within wider social controls, the move towards the single market was aimed at making greater aspects of society subject to market control.

The first wave of European integration aimed at empowering both the market and the nation state, by reducing political and social turbulence through the creation of democratic controls over the market economy. The second wave of European Integration, on the other hand, involved reducing political and social turbulence by removing the market from democratic contestation.

The Single European Act, and the Maastricht Treaty which followed, committed Europe not simply to creating a common market free of tariffs for international trade within Europe, it aimed at creating single markets ruled and regulated by a common set of rules and regulations determined at a European level.

The pre-history of the SEA is rather telling about its development. The wordy declarations by heads of states on the need for European unity continued throughout the ’70s and early ’80s. But over time the focus of these announcements, reports, draft treaties and white papers shifted from the ephemeral federalist goal of “political union” to what has always been the core of the European project: economic integration.41

Interestingly, this period of the mid-80s, in particular around the SEA, is perhaps the only point in the history of European integration when the UK plays an agenda-setting role in Europe. Desmond Dinan writes “Mitterrand and Kohl42 had succumbed to Thatcher’s minimalist programme.”43

The core of the SEA was a commitment to implement the 279 proposals in the 1985 Commission White Paper on the Internal Market and create a single market by December 31, 1992. This involved harmonizing economic regulation of a huge number of industries across Europe – thereby the regulation of the internal European market would be fundamentally European, replacing the system of national regulation.

France’s enthusiasm for this process is of interest. As noted above, Mitterrand’s agenda for pushing social democracy forward collapsed in ’83/’84 with the Franc Fort policy. In response to this shift Jean-Pierre Chevènement, the Minister of Industry, resigned and was replaced by Laurent Fabius.44 In his first speech as minister, Fabius announced that “the state does not intend to become a substitute for the role of enterprises and entrepreneurs,” and launched a series of reforms under the motto “Modernize or decline.” It is against this background of the turn to market liberalization, and the notion that France must “adapt itself to the conditions of the new world economy,” that the French government’s attitude to the SEA and Maastricht should be understood. The aim was for France to bind herself to Germany’s strong Deutschemark and to adjust her internal markets by liberalising and internationalising.45

Maastricht

While the Single European Act marked the launch of the second wave of European integration, the Maastricht treaty marked its establishment. At the core of the Maastricht treaty were two core elements: institutional change and economic integration.

The institutional changes brought in by Maastricht were substantial. For one, Maastricht established the European Union. Secondly, it established a new structure of the European Union, which was to last until the passing of the Lisbon Treaty.

The new structure brought together an array of forms of European cooperation that had previously been separate under the common framework of the EU. Part of the logic here was to increase European integration in areas beyond economic integration by tying them institutionally to economic integration. Under Maastricht, the EU was structured around “the three pillars of the EU.” These were the European Community (EC), Justice and Home Affairs (JHA), and Common Foreign and Security Policy (CFSP). Intuitively, this maps onto the economy (EC), law (JHA), and foreign affairs (CFSP). The European Community was basically the EEC renamed and was by far the most important pillar of the EU. The other two pillars that were created under Maastricht took over from relatively minor institutions, but it was hoped they would grow in importance. Justice and Home Affairs took over from TREVI, which was little more than a means to facilitate cross-border cooperation in responding to terrorism, in particular the growing number of left-wing armed actions and by Palestinian groups within Europe.46 Common Foreign and Security Policy (CFSP) took over from “European Political Cooperation” – the name given to the then existing institution which aimed to give form to the perennially unrealized dream that one day Europe would have an independent and united foreign policy.47 The competencies of neither the JHA nor the CFSP pillar grew much over time, as decision-making under these pillars was based on consensus. Therefore, many of the responsibilities under the JHA and CFSP pillars were transferred to the EC pillar, to allow for easier decision-making. With the Lisbon Treaty the pillar system was abolished, and the EU was given a single legal personality. Nevertheless, the institutional changes under Maastricht were significant, marking the creation of a single structure in relation to which essentially all future moves to greater European integration would be oriented.

The second major change with the creation of the European Union under Maastricht was the commitment to the creating the Economic and Monetary Union (EMU). The euro is the central plank of the EMU. Every member of the EU is a signatory to the Maastricht treaty and as such every country, barring two,48 is committed to joining the common currency. However, joining the euro is a three-stage process. First, the country must reach a set of “convergence criteria.” Second, it must join the Exchange Rate Mechanism II (ERM II).49 The third and final stage is adopting the euro.50

Perhaps as significant as the euro itself was the creation of the system through which countries adopt the currency. There are four convergence criteria. First, there is a tight limit on inflation.51) Second, there is an extremely tight limit on governments fiscally: debt to GDP must not exceed 60% and government deficits must not exceed 3%. Third, exchange rates must be stable with the euro. Finally, the interest rate of 10-year government bonds must be below a certain level.52

With the creation of the “Stability and Growth Pact” in 1996 the two elements of the fiscal convergence criterion – the 60% debt rule and the 3% deficit rule – were made permanent. All countries must, after accession to the euro, remain with their debt at or below 60% and with their deficit at or below 3%. If they do not meet these criteria, they must be on a path towards realizing them.

Thereby all EU countries, with the partial exception of the UK, have committed themselves to having the same regulations for the industries in their economies and having the same macroeconomic situation. Industrial regulation and monetary policy are now decided at a European level, not a national level, while national fiscal policy in the form of expansionary or contractionary policy is simply precluded by European law.

After Maastricht

Since Maastricht the second wave of European integration has not abated. There have been three major changes to the Treaties since Maastricht. First there was the Amsterdam Treaty, which was mainly about two things: the CFSP pillar, and the fact that many center-left governments had been elected and wanted to reform the Maastricht treaty by increasing the power of the European Parliament, and by including some “social” issues in the Treaty.53 Then there was the Nice Treaty, which was primarily about amending the voting arrangements in the EU to allow for the accession of Eastern European countries. Finally, there was the Lisbon Treaty. This was basically the EU Constitution under a different name. It involved a large number of changes including, as mentioned above, the abolition of the pillar system. The main thing the Lisbon Treaty did was push Maastricht further, in terms of turning the European institutions into a single integrated whole. But beyond that the Treaty did not change the direction or speed of European integration dramatically.

In terms of European economic integration things also proceed apace. Building on the success of the regulatory homogenization brought about by the Single European Act, more and more aspects of economic life within the EU are being homogenized. In some areas this is generally welcomed; for example, the creation of a single European telecoms market has resulted in technological improvements and lower roaming charges, although it has also overseen the privatization of telecoms companies. Today it is harder to think of aspects of economic life that are regulated by the national state rather than the EU,54 and the extent of European regulation of markets within Europe is only increasing. For example, today, there is a major drive to move the regulation of all aspects of the finance industry, e-commerce, and patents to a European level. In addition to the ever-increasing competencies of the EU with regards to the regulation of markets, the competence of the EU over national economic policy has also increased.

As mentioned above, the 60% debt rule and the 3% deficit rule were expanded under the Stability and Growth Pact to cover all countries all the time, not just in the period leading up to adopting the euro. However, in 1998 German debt went above the 60% mark, where it has remained since (with the exception of 2001 when it dropped to 59%). Likewise, France went over the 60% limit in 2002 and has remained above it ever since. Therefore, in 2005 the rules were changed to allow for breaches but requiring that countries have a Medium Term Objective (MTO) whereby they would return to the 60% debt, the 3% deficit and a 1% “underlying deficit.” Since the crisis this has been extended further, and now every country must have binding national legislation regarding the 60% debt and the 3% deficit rules.

In addition, the EU has significantly increased it oversight of national economic policy. This began with the Broad Economic Policy Guidelines (BEPGs), which countries had to send to the EU Commission explaining how their economic policy was in line with European objectives. Then in 1998, the European Commission began to issue Country Specific Recommendations (CSRs) explaining how countries should improve their policies. In 2000 the ten-year Lisbon Strategy was launched, which aimed to bring European economic and social policy more in line and tried to use the BEPG/CSR framework to achieve that. However, the Lisbon Strategy was not a major success, and was replaced in 2010 by the Europe 2020 strategy.

More significantly, in 2011 a new process known as the European Semester was launched.55 It is a rather complicated process of economic surveillance through which the EU monitors national economic development. It combines and integrates

A reinforced Stability and Growth Pact, with significant sanctions if countries breach the set objectives
A Macroeconomic Imbalance Procedure which sets out 10 objectives which a country must achieve
The overview of national budgetary plans by the European Commission
A reinforced process around Country Specific Recommendations
A set of sanctions for countries that are failing to achieve their targets
An annual framework through which this entire process is organised
A framework through which countries that are failing to address their problems are dealt with
In addition to these recent reforms, during the ongoing economic crisis Ireland, Portugal and Greece have been placed in EU/ECB/IMF recovery programmes, which determine economic policy for a few years.56

Having now followed the process of European integration up to the current day, it is now possible to make some general remarks. I have already made a distinction between the first wave and second wave of European integration. The first was an attempt to gain control over the market, in order to both avoid socialist change and facilitate the integration of labor and agricultural interests into capitalist governance. The second wave was qualitatively different. Over the last thirty years, with the second wave of European integration, greater and greater responsibility for economic regulation is being shifted to the European level. This happened in response to the political impasse faced by the Left, and the new political economic situation that had developed by the 1980s. Control over economic regulation was taken out of the hand of democratic national states and transferred to the European Union.

V: The European Union as State Form

This brings us back to the Middle Ages – to what might have seemed the slightly esoteric start to this article. As described above, the emergence of capitalism was characterized by a division of social power into economic power and political power. Economic power is the power to buy and sell, in particular to buy labor-power and sell the commodities produced. Political power, on the other hand, is power over violence. The control over violence implied in political power involves not only the exercise of violence, but also the determination of when and how to exercise that violence. This determination process involves setting down rules, and the contestation of those rules. Less abstractly, it is through the state that laws are made, contested and enacted. These laws create the framework through which social reproduction occurs under capitalism. The state thereby uses its control of violence to determine the framework through which economic life occurs, and acts as a means and forum for the contestation and change of this framework.

We can therefore see how with the postwar settlement, the framework through which economic life occurred was changed by the expansion of state action into aspects of economic life that were previously considered outside the scope of politics.

We can also understand what has happened with European integration. The first wave of European integration was an aspect of the general expansion of state action into previously non-political spheres. The development of the welfare state and the incorporation of the organized working class into capitalist governance at a national level went hand in hand with European integration. The EEC and the organizations that preceded it developed to facilitate the democratic governance and organization of international economic activity. This was the international dimension of the primarily national process of the postwar settlement.

The second wave of European integration is rather different. This too can be understood as the international dimension of a primarily national process. But this national process was a process whereby democratic intervention in the economy was being reduced. However, this did not mean simply deregulation or privatization. In Europe it involved the transfer of power over economic regulation out of the hand of the national state and onto a supranational level. Increasingly, the laws that govern economic activity in the EU are determined at a European level.

While the power of the feudal lord was bifurcated into the economic power of the modern employer and the political power of the modern state, the development of the EU over the last 30 years involves a further bifurcation. The political power of the state involves the creation, contestation, and implementation of the legal framework for economic life and the rise of the EU involves the bifurcation of this political power. The EU now creates the regulations that govern almost all aspects of economic life in Europe. However, both the contestation and implementation of these regulations remains at a national level. This is not sustainable.

Today, the political contestation of economic life, which has been the core of liberal democracies based on universal suffrage, is increasingly impossible. In each national state, governments change, but the policies do not. Policies are not set by national government, but by the EU. But it is not possible to democratically change the government of the EU, or to democratically change the policies it pursues.

This has not only drawn outrage from the European electorate, but also from national governments. In 2012, when Olli Rehn, the European commissioner for economic and monetary affairs directed the Belgian government to cut between €1.2 billion and €2 billion from its budget, a government Minister responded: “Who knows who Olli Rehn is? Who has seen Olli Rehn’s face? Who knows where he comes from and what he’s done? Nobody. Yet he tells us how we should conduct our economic policy.”57

The superficial solution to this “democratic deficit” would be to return to national democracies. This is not an unpopular idea. We see this demand being raised by both the far right and the far left. In France, the quasi-fascist Front National was the largest party in the 2014 European Parliament election winning one in every four votes cast. In the UK the right-populist UK Independence Party also topped the poll. In Italy, the “Five Star Movement” went from nothing to winning 20% of the vote. In social democratic Denmark, the extreme right Danish People’s Party also topped the poll.

However, the superficial, and obviously popular, appeal for a return to national democracy does not correspond with the social possibilities that exist today. I have tried to describe at some length the crisis in response to which the EU and the second wave of European Integration developed. And I have tried to show that the alternative route pursued by the Mitterrand government in France in the early 1980s did not and could not work. In the presence of free capital movement, the kind of policies that Mitterrand pursued will always end with balance of payments crises.

This is not to pose some grim inevitability to the European development, but rather to point to the fact that the scope of change that has occurred over the last 150 years is massive, and that to change the direction of its further development involves more than political ambition or a change in political focus. The postwar settlement happened where there was an imminent threat of socialist revolution and where, due to wartime capital controls, it was very hard for capital flight to occur. We are living in a very different world.

Europe is at an impasse. Economic regulation now takes place at a European level, but the social contestation of economic issues is contained at an impotent national level. It seems most likely that European integration will continue to follow the path mapped out in this article for the foreseeable future. Despite this, one fact remains: all structures of governance rely on the passive consent of the governed. It is hard to see much hope for socialist change in Europe. But it is equally hard to see European’s passive consent lasting indefinitely.

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